In June, Trade and Industry Minister Piyush Goyal announced the states start-up ranking for the year 2021. While Gujarat and Maharashtra are the top performing states, Meghalaya received the highest honors among the Northeastern States.
These rankings are based on market access, capacity building, enabling environment for incubation, promotion of entrepreneurship and innovation, funding and institutional support for start-ups in India.
India has done relatively well in the field of start-ups over the past decade, thanks to various government policy initiatives.
However, Indian start-ups generally face many obstacles such as fierce market competition, change in customer preferences, evolving technology, shortage of skilled personnel, market linkages, lack of financial support, etc.
Among all these, the lack of free access to finance and market linkages are the main stumbling blocks for start-ups to survive and thrive. Out of 61,400 start-ups launched in India, nearly 93% have been unable to raise funds from angel investors so far. Moreover, very few agricultural start-ups have raised funds through this channel.
In fact, the start-up ecosystem in India is skewed towards big data, edtech, fintech, logistics and supply chain activities, rather than agriculture. The main reason could be the low purchasing power of the target segment: farmers. More than 86% of them are small, marginal farmers.
India has more than 1,000 start-ups offering agro-technological innovations. However, they lack scale due to the high cost of serving small/marginal farmers.
While start-ups offer innovative and emerging technological solutions due to their expertise in the field, they are not adept at financial management.
As finance is the lifeblood of any business, more so in the case of agricultural start-ups, their financial health can be improved by adopting the following:
Proper support recordings: Start-ups do not have easy access to finance due to their opaque books and insufficient business information (Kaplan and Stromberg, 2001). Farm start-ups can attract more investors by maintaining proper books of account that reflect a true and fair view of business operations.
Other stakeholders, namely customers, employees and suppliers, also expect proper record keeping from start-ups. Multi-user software through a cloud-based accounting system, tax planning, and automated tax filings powered by artificial intelligence can prove useful for agricultural start-ups.
Opening of a separate business bank account: Following the concept of ‘business entity’, each young agricultural entrepreneur should maintain a separate bank account for their business to distinguish it from the owner’s personal financial transactions. In accordance with historical case law on Salomon vs. Salomon Co. Ltd., a business entity will not only ensure the payment of a justified claim, but also the defense against unjustified claims.
Affordable development and climate-smart technologies: agricultural start-ups can have a better success rate if they focus on SDG13, i.e. climate action, while developing their products and services. Farm start-ups Gold farm, Khehinext, Oxen have raised $13 million by making their services affordable to small and marginal farmers.
Preparation of a realistic budget: Agri-food start-ups must prepare their budget pragmatically by validating their financial projections. Additionally, they should monitor their performance using the CEO Dashboard (sales, expenses, profit, etc.) at quarterly intervals to ensure everything is in order.
Optimal use factors of production: Agri-startups can improve their total factor productivity by adopting an asset-lean approach and raising funds from internal sources. For example, instead of buying fancy machinery/equipment at the early stage, start-ups can opt to rent these to reduce costs and maximize returns.
Finance management flows: If the profit and loss account scans the business operations of the start-up, the cash flow statement x-rays its financial health. Essentially, reduced inventory and fast receivables improve their cash flow.
Therefore, agribusinesses need to manage their cash flow, both short and long term, to meet the demands of suppliers, bankers, investors, etc.
Generally, companies follow the “pecking order theory” to raise their financial resources (internal financing, debt and equity in this order), but start-ups resort to equity after raising internal resources, can to be because of their disruptive business models.
patting angel investors: The perceived capability of a start-up goes well beyond its track record, past achievements and is usually measured by the investors’ internal rate of return (Gompers and Lerner, 1998). Angel investors, among others, are looking for valuation mismatches, exit opportunities, regulatory and tax issues before investing in agricultural start-ups.
Moreover, information asymmetries about start-ups will lead to moral hazard and adverse selection. In addressing this, Ninjacart, an agricultural start-up involved in the supply chain, raised $164 million from angel investors.
build strong networks: The network is the net worth of any entrepreneur. Although agricultural start-ups work in small teams, they must network with a host of agricultural researchers, financial experts and technological assistants.
Farm start-ups such as Stellapps and Sid’s Farm Dairy Supply Chain have digitized by leveraging advanced technologies and networking applications to connect to market.
Risk management : Every day is a new day for any entrepreneur. As seasonal businesses, agricultural start-ups face new challenges and integrated risks – credit, market and operational – that require proper measurement and skillful management.
ESG factoring in the business model: As ESG (Environmental, Social and Governance) gains traction in the market, agricultural start-ups can develop their business model in a sustainable way. A good example is Licious, India’s first D2C unicorn, which won the Thought Leadership Award for its ESG compliance in 2021.
In summary, in addition to providing quality goods and services to customers at a reasonable price and in a timely manner, agricultural start-ups must focus on their financial health by leveraging skilled young people and digital technologies.
If agricultural start-ups manage innovation, finance and marketing correctly, they will become unicorns/decacorns in no time.
Srikanth is Associate Professor, Registrar and Director (Finance), and Syamala is Research Officer, NIRDPR, Hyderabad
August 15, 2022